Are you being told not to buy Indian stocks?

In the market people always have motives for saying one thing over another. In this case it could be that clients of particular companies have not fully loaded up yet shares of Indian stocks, thus they are trying to keep buyers away. When you start hearing news items saying buy all you can, thats when you know they are trying to sell you their shares.

Indian stock markets are on a dream run fuelled by global liquidity and stronger economy. But retail investors must tread with caution and buy stocks only for long term, suggests Suresh Nandi. Early last week when the Bombay Stock Exchange’s Sensex crossed the psychological barrier of 19,000 mark — that too after a gap of 32 months - analysts on D-Street began to believe that it is a bull run again.

The Sensex reset 32-month high on the Wednesday last, with a gain for the 7th consecutive day, to close at 19,502 points driven largely by robust foreign fund flows on the one hand and a catch up rally in index heavyweight player Reliance Industries (RIL) on the other. What’s more? The country’s top software services exporters, who derive more than 50 per cent of their revenue from the United States, also joined the revelry. The Sensex closed at 19,595 on Friday registering a 900 points gain during the week. Since Feruary 2009 when it had dropped to 9724, Sensex has gained nearly 10,000 points in the last 19 months. Yet, the Sensex is still short of 1611 points from its all time high of 21,206 on January 10, 2008.

The S&P CNX Nifty at National Stock Exchange or NSE closed the week at 5,885, also with a huge gain. Take a closer look at the broader market range, you will realise that Nifty is in a bull market since March 2009. The 50-scrip index of NSE started from a low of 2,573 points on March 9, 2009 to cross 5,850 mark in September 2010.

Of course, in this great bull run of 2010, there were many occasions when the stock indices corrected and dropped. But market experts maintaining bullish outlook say that any correction from now onwards would not last long and it would be just for profit taking exercise. All the same, the momentum stays as the latest Reuters poll findings predicted that the BSE Sensex will surpass record highs in the first half of 2011 on the back of a booming economy, though currently it will show a small rise between now and the end of the year.

Suffice to say that Indian equities have entered a new bull market phase with a 20 per cent gain from 2010 lows. Yes, all other emerging markets have also grown, but India has outpaced everyone. Said Centrum Broking MD & CEO Sanju Verma, “…going forward there will be bouts of risk aversion plus there will be bouts of increasing risk appetite as well for investors who are chasing high yield.”

The fuelling factors Though strong economic data may have also contributed to the rally, the main driver that is taking key indices up is foreign money. Globally, the liquidity conditions are good and given that the developed world is struggling with growth, money is pouring into high growth destinations like India, explains Angel Broking CMD Dinesh Thakkar and points out: “the India fundamentals are strong amongst its peers which has aided significant flows towards India.” Sebi data shows that as of now in the current fiscal the foreign institutional investors (FIIs) have made net investments of $15.4 billion and this includes a net buying of $2.4 billion from 11 trading sessions this month. “The current bull market is liquidity-based and momentum-driven but not so much fundamentally. It is perfect for bulls playing short term games. The foreign investors and Indian market are behaving like newly married couple, not getting enough of each other,” says SMC Capital Equity Head Jagannadham Thunuguntla. In contrast, Indian financial institutions are net sellers of shares booking profits at every peak the Sensex reached.

Strong economic data Foreign money apart, most players on the D-Street believe that strong economic data has also contributed to market rally. One such big positive is the Index of Industrial Production (IIP) or simply known as ‘industrial output’ expanded by nearly 14 per cent in July 2010 over the same moth previous year. The double-digit output growth was much higher than the single-digit growth previously expected. CLSA Acia-Pacific Markets strategist Christopher Wood predicts that India’s annual economic growth may top 9 per cent in the next five years and that would make the country the world’s fastest-growing major economy, which expanded 8.8 per cent in the second quarter.

Take another indicator: the Indirect Tax collection in the first five months of this fiscal (April-August 2010) at Rs 124,170 crore showed a whopping increase of 45 per cent over the same period last fiscal. Highest increase was in customs duty collection: up 67 per cent to Rs 51,866 crore (proving exports were higher on capital investments made by the industry), while excise duty collection went up by 42 per cent to Rs 49,672 crore and service tax up by 20 per cent to Rs 22,632 crore.

Reflecting higher profits, advance tax collection for the second quarter (July-September) of this fiscal indicated that India Inc. is set to report another good performance with sectors like banking, finance and auto doing well. The Mumbai region - accounting for a major chunk of direct tax collection - has clocked over 13 per cent growth in advance tax payments.

India growth story is also reflected in the foreign currency market with the Rupee emerging as the most-traded currency among the BRIC economies and the third-largest Asian currency after Hong Kong dollar and Korean Won, this year. As per the latest survey of the Bank of International Settlements (NASDAQ:BIS) in Basel, Switzerland, the Rupee accounted for the largest share among the BRIC economies along with Russia.

Apart from robust industrial production, the government’s finance is in good shape as it earned a windfall of around Rs 100,000 crore from telecom auctions this year. Naturally, the government’s budget deficit in the current financial will be lower than anticipated. Balance of payment (BoP) situation is also comfortable, with the continuous inflow of funds into India. On the whole, the Indian economy is in a good shape and is seen as the only economy in Asia driven by domestic demand.

Is the bull run sustainable? In terms of valuations, India equities have become one of the most expensive markets globally, even among the fast growing BRIC nations - Brazil, Russia, India and China - but then the stronger growth also leaves room for further gains. But Morgan Stanley Asset Management’s Executive Director Jayesh Gandhi disagrees saying corporate earning potentials justify high valuations. While India is trading at 18.3 times estimated earnings as compared with Russia’s 7.8 times and China’s 15.8 times, according to Bloomberg estimates.

The rally in stock markets may continue as long as central banks across in the developed countries keep interest rates at record lows, helping investors borrow cheap and invest in high-yielding emerging markets. And this very rush may push valuations ahead of fundamentals like it happens in every bull market. “Markets can remain beyond fundamentals for a while and the rally could stretch for a couple of months, but it cannot sustain longer than that,” says Karvy Stock Broking Vice President Ambareesh Baliga. Even though the stock indices are rising steadily there is not much of euphoria across all investors’ class like we saw in the bull run in 2008. For one, the rally now is not broad based in the real sense as more than half the stocks in the broader BSE 500 Index, which represents nearly 93 per cent of the total market capitalisation, are trading 30 per cent below their all time highs. This in turn suggests that the market rally is widening the valuation gap between large-cap and mad-cap stocks.

Threats remain All the same, Angel Broking’s Thakkar maintains that “given the current bull run is on the back of strong fundamentals of the Indian economy, we think that the domestic equities is structurally well placed for a long term bull run.” Similarly, ICICI Prudential’s Chief Investment Officer Nilesh Shah says: “2008 kind of correction could occur only if global kinds of events occur. Today probability of those events occurring will be very limited. Central banks around the world will do whatever is possible in their war chest to ensure that the world doesn’t go into deflation.”

On fears of US and European economies slipping into a double-dip depression, Thakkar said: “The markets have already factored a possible double dip. Further, given low exposure of the India to the global economy, the economic growth of India would not be impacted.”

Despite the bullish outlook, the fear among most market participants is the kind of fund flows that has come to play. D-Street has not forgotten the 2007-2008 phenomena when the same FIIs had pulled out from emerging markets like India by selling stocks in hoards. That is why SMC Capital’s Thunuguntla cautioned that only those who are ready to take risk should buy stocks in this market. No wonder domestic financial institutions like insurance companies and mutual funds have taken a contrasting position in the current rally, while FIIs are chasing the India growth story fiercely.